PERS company valuations predicted to rise

Epstein: Look for more PE activity in PERS market
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Wednesday, September 25, 2013

PARK CITY, Utah—Fresh off moderating a PERS Summit panel, Barry Epstein, president of Dallas-based Vertex Capital, expects the PERS acquisition market to heat up as valuations climb. 

“The market will continue to grow as new entrants come into the market seeking recurring revenue companies,” Epstein told Security Systems News. “Valuations will move upward as churn is decreased and the average life of the account lengthens.”

Epstein moderated a panel discussion about the PERS acquisition market at the annual AvantGuard Monitoring PERS Summit, which took place Sept 10-12 in Park City, Utah. The panel included: John Brady, president of TRG, an alarm industry consulting firm; Les Gold, an attorney with Mitchell, Silberberg & Knupp; and Will Schmidt, managing director of security lending group at CapitalSource. 

Most PERS companies are nowhere near maximizing their value from an RMR standpoint, which limits their acquisition value, according to Epstein. While metrics vary, it is generally accepted that PERS accounts have higher rates of attrition than alarm accounts. The annual attrition rate for alarm accounts hovers between eight and 12 percent, while that of PERS accounts is said to be 24 and 36 percent, Epstein said. 

Some of these rates can be chalked up to the relative youth of the market as compared to the alarm industry, together with still-developing market research. High rates may also be attributable to a senior clientele, that stops using the service because they die, rather than because they’re dissatisfied with the service.

However, Epstein believes overall attrition rates will improve, and the industry could see a surge in value aided by private investment capital. Epstein pointed out that private equity firms are typically attracted to the RMR model. “The combination of better metrics and new, large buyers will make the acquisition market robust over time,” Epstein told SSN. 

Mark Sandler, a principal with SPP Advisors, an investment banking firm in the PERS and security industry, believes high attrition rates can be a red flag to buyers, but only if they’re truly exorbitant. After all, he noted, attrition in the PERS space is inevitable because the products are tailored for older customers. 

A metric of greater importance, he said, is how efficiently a company can create consistent RMR despite high attrition. “You’re buying the unit’s ability to generate recurring revenue for you,” he said. “You’re buying a machine that enables you to efficiently redeploy those assets.”

With this in mind, another important related metric, Sandler noted, is the percentage of devices a given company retrieves from customers, since a PERS company can generate value by redeploying a used PERS device. A good PERS company will get 95 percent or more of its units back, and will be able to clean the units and redeploy them in a matter of days, Sandler said. 

The PERS business model relies on hyper-efficiency in the face of attrition to generate potentially robust revenues—that much is known. What’s less certain is what type of company stands to prosper in this climate.

One of the more surprising observations from the show, according to Epstein, was the composition of the attendees, a group comprised of representatives from 75 dealers and 20 manufacturers. “One might have thought that alarm companies would be there looking to augment their business with a new market for RMR,” Epstein said. “It was surprising to see that over 80 percent of the dealers were strictly PERS, with little or no alarm accounts.” 

Whether the PERS industry is becoming what Epstein termed “an industry unto itself” remains to be seen. But he predicted that alarm companies will find it challenging to enter the PERS space. He said it would be like the challenges traditional dealers encountered going after mass-market accounts. “Unless you’re large enough, it’s hard to put that in a division that focuses exclusively on the PERS market,” Epstein said. Last month, Moon Security, a full-service security company based in Pasco, Wash., launched Moon Medical Alert, a PERS-only division.

As far as newcomers to the PERS industry are concerned, it is difficult to predict when the market will see its expected surge in private investment value. But favorable demographics, together with the continued development of mobile PERS units, could signal that it’s not far off. “You don’t know when buyers will come in and you don’t know when markets will explode,” Epstein said. “It’s hard to predict, but you can see the trend is upward toward acquisitions, and they’ll increase substantially as more dealers reach a size attractive to larger, outside buyers.”